Question about interest on savings

InMyDreams

dave0000 wrote: »

hmm so the sunday times agrees with what i said fist that with monthly you earn more is this right or wrong this is confuseing

You have to look at the gross rate and the aer rate. [Edit: aer stands for annual equivalent rate]

If the gross rates are the same, then monthly is best because of the interest you get on the interest. This is why savings accounts have to tell you the aer rate too. The whole idea of the aer rate is so that you can compare monthly with yearly accounts.

For a yearly account, the gross rate and the aer is the same.

For a monthly account, the aer rate will be slighly higher than its gross rate to show you what effect the intrest on the interest (compounding) will have. This is why they call it a 'notional' rate. What they pay you is the gross rate, but the effect of the compounding makes it equivalent to the aer rate over a year.

That's why to compare a yearly with a monthly you must look at the aer rate. (The tax thing is minimal, as shown above.)

opinions4u

If you have the following:

5.84% a year, paid monthly = 6.00% AER
6.00% a year, paid annually = 6.00% AER

They are both earning the same rate.

If your monthly interest remains in the same account and is not spent, the interest on interest over a year will mean you earn 6.00% AER.

If your monthly interest is sent to an account paying less than 6.00% AER, you will never actually reach 6% interest on that money.

Often you will lose the use of that money for interest earning for a few days while it is transferred, and in many cases people will spend it as income anyway.

If you spend it, it stops earning interest at that point, so you can never earn the interest on interest that makes a 5.84% rate 6.00% AER.

Does that help, or have I just made it even more confusing?

The current rates for Halifax Guaranteed Reserve pay a higher AER for taking interest monthly.

http://www.halifax.co.uk/savings/guaranteed_reserve.asp

The problem is, the AER assumes that the money is invested in to an account paying exactly the same rate. If it is remitted to bank account paying nothing, the gross rate, not the AER is more accurate:

http://www.halifax.co.uk/savings/personalrates.asp#Halifax_Guaranteed_Reserve_monthly_rates

CLAPTON

opinions4u wrote: »

If you have the following:

5.84% a year, paid monthly = 6.00% AER
6.00% a year, paid annually = 6.00% AER

They are both earning the same rate.

If your monthly interest remains in the same account and is not spent, the interest on interest over a year will mean you earn 6.00% AER.

If your monthly interest is sent to an account paying less than 6.00% AER, you will never actually reach 6% interest on that money.

Often you will lose the use of that money for interest earning for a few days while it is transferred, and in many cases people will spend it as income anyway.

If you spend it, it stops earning interest at that point, so you can never earn the interest on interest that makes a 5.84% rate 6.00% AER.

Does that help, or have I just made it even more confusing?

The current rates for Halifax Guaranteed Reserve pay a higher AER for taking interest monthly.

http://www.halifax.co.uk/savings/guaranteed_reserve.asp

The problem is, the AER assumes that the money is invested in to an account paying exactly the same rate. If it is remitted to bank account paying nothing, the gross rate, not the AER is more accurate:

http://www.halifax.co.uk/savings/personalrates.asp#Halifax_Guaranteed_Reserve_monthly_rates

While this may be true you're not comparing like for like.
In one case you are making a withdrawal each month and comparing that with an account where no withdrawals are made.
So if you have a yearly a/c but withdraw a few pounds each month then you won't get the full 6% either.

opinions4u

CLAPTON wrote: »

While this may be true you're not comparing like for like.
In one case you are making a withdrawal each month and comparing that with an account where no withdrawals are made.
So if you have a yearly a/c but withdraw a few pounds each month then you won't get the full 6% either.

Agreed.

I think that was the message I was trying to get across - maybe tied myself in knots doing so - different circumstances mean you need to apply a different interpretation to the value you would get from monthly or annual interest.